1
The IRS Ceased Compliance With the $10 Million
Taxpayer Treasury Directive in Favor of an Overall Focus
on High-Income Taxpayer Noncompliance
June 20, 2024
Report Number: 2024-300-028
TIGTACommunic[email protected]eas.gov | www.tigta.gov
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
HIGHLIGHTS: The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
Final Audit Report issued on June 20, 2024 Report Number 2024-300-028
Why TIGTA Did This Audit
This audit was initiated to
determine whether the IRS is
meeting the former Secretary of
the Treasury’s established goal
requiring the IRS to audit a
minimum of 8 percent of all high-
income individual returns, with
incomes more than $10 million,
filed each year.
On February 10, 2020, the then
Secretary of the Treasury directed
the IRS, pursuant to 26 United
States Code Sections 7801 and
7803(a)(2), to audit a minimum of
8 percent of all high-income
individual returns filed each year.
On March 13, 2020, the IRS
Commissioner responded that
accomplishing the goal would
require significant opportunity
costs but agreed to comply using
total positive income of $10 million
or more to select returns (2020
Treasury Directive).
In August of 2022, the Inflation
Reduction Act was enacted with
the purpose in part to fund the IRS
so that it could examine more
high-income taxpayers. In an
August 2022 directive to the IRS,
the Secretary of the Treasury
directed that no Inflation
Reduction Act funding should be
used to increase the audit rate of
taxpayers with incomes below
$400,000 (2022 Treasury Directive).
Impact on Tax Administration
An analysis of the 2020 Treasury
Directive assists in understanding
the impact on audit productivity
that comes from focusing audit
resources on taxpayers above
certain high-income thresholds.
What TIGTA Found
The IRS complied with the 2020 Treasury Directive for three tax years
but ceased monitoring it at the end of Fiscal Year 2023. At the start
of this audit, an IRS executive informed TIGTA in December of 2022
that the 2020 Treasury Directive would no longer be followed
because these audits were unproductive having high no-change
rates. The IRS also stated it was embarking on a different approach
focusing on complying with the 2022 Treasury Directive.
TIGTA found that many of the examined returns pursuant to the 2020
Treasury Directive were productive depending on which IRS function
conducted the examinations and which case selection methods
were used. The Small Business/Self Employed Division’s closed
examinations of individual taxpayer returns with income of
$10 million or more, in Tax Years 2016 through 2021, were generally
more productive than income ranges below $10 million, yielding
four times more dollars assessed per return and two times more
dollars assessed per hour when compared to examinations of returns
with income of $400,000 to under $10 million.
On the other hand, Large Business and International Division case
selection methods in place prior to the 2020 Treasury Directive
resulted in better productivity metrics when compared to
post-Treasury Directive results. For example, the no-change rate has
increased when comparing pre-directive tax years (Tax Years 2016
through 2017) to post-directive tax years (Tax Years 2018 through
2020).
TIGTA also found that some of the opportunity costs the IRS
identified in response to the Department of the Treasury at the
outset of the 2020 Treasury Directive were overstated by
190 examinations of large and mid-sized businesses.
What TIGTA Recommended
TIGTA made two recommendations to the IRS: (1) include a separate
category for taxpayers with TPI of $10 million or more when
evaluating the compliance of high-income individual taxpayers for
Initiative 3.4 of the IRS Strategic Operating Plan to ensure the
productivity of examinations on these high-income individual returns
are tracked and analyzed in comparison to examinations of taxpayers
at other income levels; (2) identify the potential causes for the Large
Business and International Division’s low productivity examination
results and monitor measures to ensure that the most productive
returns are selected for examination.
The IRS partially agreed with both recommendations stating that it
already categorizes and monitors productivity measures for
high-income high-wealth taxpayers, including those with TPI of $10
million or more, and that it will identify the potential causes for the
low productivity examination results and will use enhanced data and
analytics to select cases based on the highest risk of noncompliance.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
June 20, 2024
M
EMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE
F
ROM:
SUBJECT:
Matthew A. Weir
Acting Deputy Inspector General for Audit
Final Audit Report – The IRS Ceased Compliance With the $10 Million
Taxpayer Treasury Directive in Favor of an Overall Focus on
High-Income Taxpayer Noncompliance (Audit No.: 202330020)
This report presents the results of our review to determine whether the Internal Revenue Service
(IRS) was meeting the Department of the Treasury’s established goal of auditing a minimum of
8 percent of all high-income individual returns filed each year.
1
This review was part of our
Fiscal Year 2023 Annual Audit Plan and addresses the major management and performance
challenge of
Increasing Domestic and International Tax Compliance and Enforcement
.
Management’s complete response to the draft report is included as Appendix V. If you have any
questions, please contact me or Phyllis Heald London, Acting Assistant Inspector General for
Audit (Compliance and Enforcement Operations).
1
Our audit focused on IRS examinations of individual returns with total positive income of $10 million or more, which
the IRS used to comply with the minimum 8 percent audit rate goal.
The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
Table of Contents
Background .....................................................................................................................................Page 1
Results of Review .......................................................................................................................Page 3
The IRS Achieved Compliance With the 2020 Treasury
Directive for Three Tax Years Until Compliance Was
Terminated .............................................................................................................................Page 3
The Small Business/Self-Employed Division’s
Examinations of Individual Returns of Taxpayers Earning
$10 Million or More Have Generally Been More
Productive Than Returns Examined at Lower Income
Levels ........................................................................................................................................Page 5
Recommendation 1: ...................................................................Page 8
The Large Business and International Division’s Selection
Methods for Returns Examined as Part of the 2020
Treasury Directive Need Improvement ........................................................................Page 9
Recommendation 2: ...................................................................Page 13
The IRS Overstated the Opportunity Costs Associated
With the 2020 Treasury Directive ...................................................................................Page 14
Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 16
Appendix II – Secretary of the Treasury Steven Mnuchin’s
February 10, 2020, Directive to IRS Commissioner Charles Rettig ....................Page 18
Appendix III – IRS Commissioner Charles Rettig’s March 13, 2020,
Response to Secretary of the Treasury Steven Mnuchin’s
February 10, 2020, Directive .............................................................................................Page 19
Appendix IV – Secretary of the Treasury Janet Yellen’s
August 10, 2022, Directive to IRS Commissioner Charles Rettig .......................Page 23
Appendix V – Management’s Response to the Draft Report ..............................Page 25
Appendix VI – Glossary of Terms ...................................................................................Page 29
Appendix VII – Abbreviations ..........................................................................................Page 30
Page 1
The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
Background
On February 10, 2020, the Secretary of the Treasury issued a memorandum to the Internal
Revenue Service (IRS) Commissioner directing the IRS, pursuant to 26 United States Code
Sections 7801 and 7803(a)(2), to take all steps necessary to audit a minimum of 8 percent of all
high-income individual returns filed each year, starting with Tax Year (TY) 2016 (hereafter
referred to as the 2020 Treasury Directive).
1
The 2020
Treasury Directive also defined “high-income individual
returns” as individual tax returns with adjusted gross
income in excess of $10 million.
2
In this
communication, the Secretary also stressed that,
“Robust enforcement of the tax laws is critical to
ensuring fairness in our tax system. By pursuing
taxpayers who fail to comply with their tax obligations
the IRS treats compliant taxpayers fairly and
incentivizes all taxpayers to voluntarily comply with the
law.
” The IRS has traditionally categorized taxpayers
with total positive income (TPI) of $200,000 or more as
“high-income” taxpayers, which has not been updated
since June 2006. In multiple reports, the Treasury Inspector General for Tax Administration
(TIGTA) has recommended that the IRS reevaluate its threshold for what it considers
high-income taxpayers.
3
The IRS agreed to study TIGTA’s recommendation in 2015, but as
recently as 2023 disagreed with TIGTA’s recommendation to increase the dollar threshold for
what constitutes high-income taxpayers.
On March 13, 2020, then IRS Commissioner Charles Rettig provided a response to the Secretary
of the Treasury’s February 2020 Treasury Directive stating that the IRS would use TPI of
$10 million or more to select returns.
4
The Commissioner expressed various limitations and
trade-offs to comply with the 2020 Treasury Directive. First, the assessment statute of
limitations is generally three years from the date a return is filed, and therefore, the IRS would
generally be prevented from examining TYs 2016 and 2017.
5
New examinations are usually
opened with more than 18 months remaining on the statute of limitations to allow sufficient
time for an audit to be completed. For TY 2016, the IRS’s projected coverage rate for taxpayers
with TPI of $10 million or more would be around 6.5 percent because there was little time
remaining on the TY 2016 statute of limitations to initiate additional examinations in a manner
1
Correspondence, Secretary of the Treasury Steven Mnuchin to IRS Commissioner Charles Rettig. (Feb. 10, 2020).
See Appendix II. Generally, the tax year is synonymous with the calendar year. See Appendix V for a glossary of
terms.
2
Adjusted gross income, in the case of an individual, means gross income minus certain deductions and losses listed
in Internal Revenue Code Section 62(a).
3
TIGTA, Report No. 2015-30-078,
Improvements Are Needed in Resource Allocation and Management Controls for
Audits of High-Income Taxpayers
(Sept. 2015); TIGTA, Report No. 2023-30-054,
The IRS Needs to Leverage the Most
Effective Training for Revenue Agents Examining High-Income Taxpayers
(Aug. 2023).
4
Correspondence, IRS Commissioner Charles Rettig to Secretary of the Treasury Steven Mnuchin. (Mar. 13, 2020).
See Appendix III.
5
Internal Revenue Code Section 6501(a).
“
Robust enforcement of the tax
laws is critical to ensuring
fairness in our tax system. By
pursuing taxpayers who fail to
comply with their tax
obligations, the IRS treats
compliant taxpayers fairly and
incentivizes all taxpayers to
voluntarily comply with the law
.”
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The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
that might materially improve that percentage. Similar challenges were referenced in meeting
the audit rate for examinations of TY 2017 tax returns.
Second, was the need for additional resources and the opportunity costs associated with
complying with the 2020 Treasury Directive, suggesting that achieving and maintaining an
8 percent audit rate for high-income individuals would require:
• More resources of at least 400 full-time revenue agents, with the majority being at the
General Schedule Grade 13 level;
6
and
• Opportunity costs consisting of 900 fewer audits of large and mid-size business returns,
600 fewer audits of small corporate returns and 850 fewer audits of individual returns
with TPI under $10 million.
The Small Business/Self-Employed (SB/SE) Division and the Large Business and International
(LB&I) Division conduct the audits of higher income taxpayers, including those of individual
returns with TPI of $10 million or more (hereafter referred to as “$10 million or more income”
returns/audits). The IRS initially split the responsibility equally for complying with the 2020
Treasury Directive between the SB/SE and LB&I Divisions; however, because the LB&I Division’s
resources were limited due to other work, the allocation shifted starting with TY 2019 returns
selected for examination so that the SB/SE Division would be responsible for two-thirds and the
LB&I Division would be responsible for one-third of the audits.
7
As such, both divisions play a
critical role in the IRS’s compliance with the 2020 Treasury Directive.
In August 2022, the Inflation Reduction Act of 2022 was enacted, providing $79.4 billion (in
addition to other funds made available) to the IRS over a decade.
8
Congress allocated
$45.6 billion of Inflation Reduction Act funding towards enforcement activities. Through
multiple subsequent recissions, these amounts were reduced to $57.8 billion and $24 billion,
respectively.
9
As the Secretary of the Treasury wrote to the then IRS Commissioner in August of
2022, Inflation Reduction Act enforcement funding was intended in part to increase
examinations of high-income taxpayers (hereafter referred to as the 2022 Treasury Directive).
The Secretary stated:
Specifically, I direct that any additional resources—including any new personnel or
auditors that are hired—shall not be used to increase the share of small businesses or
households below the $400,000 threshold that are audited relative to historical levels.
6
Revenue agents at the General Schedule Grade 13 level are highly trained and are knowledgeable in the full range
of tax issues, accounting systems, and tax compliance programs relative to conducting Federal tax examinations. A
GS-13 revenue agent in the Large Business and International Division will work on cases involving individuals and
business organizations that may include extensive subsidiaries with operations of national and/or international scope,
while a GS-13 revenue agent in the Small Business/Self-Employed Division will work on cases involving returns filed
by individuals, small businesses, organizations, and other entities.
7
TIGTA, Report No. 2023-30-054,
The IRS Needs to Leverage the Most Effective Training for Revenue Agents
Examining High-Income Taxpayers,
p. 10 (Aug. 2023). At the end of Fiscal Year (FY) 2020 there were 4,215 revenue
agents in SB/SE and 3,062 in LB&I. As of March 31, 2023, there were 4,227 revenue agents in SB/SE and 2,908 in LB&I.
8
Pub. L. No. 117-169, 136 Stat. 1818.
9
Congress subsequently rescinded approximately $1.4 billion in IRA funding with Section 251 of the Fiscal
Responsibility Act of 2023, Pub. L. No. 118-5, and an additional $20.2 billion with Sections 530 and 640 of the Further
Consolidated Appropriations Act, 2024, Pub. L. No. 118-47;
i.e.
, a total $21.6 billion reduction in funding and
allocation to enforcement activities.
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The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
This means that ... small businesses or households earning $400,000 per year or less will
not see an increase in the chances that they are audited.
Instead, enforcement resources will focus on high-end noncompliance. There, sustained,
multiyear funding is so critical to the agency’s ability to make the investments needed to
pursue a robust attack on the tax gap by targeting crucial challenges, like large
corporations, high-net-worth individuals and complex pass-throughs, where today the
IRS has resources to initiate just 7,500 audits annually out of more than 4 million returns
received
.
10
At the initiation of this audit in December 2022, the acting Deputy Commissioner for Services
and Enforcement informed TIGTA that the IRS was no longer going to pursue the 2020 Treasury
Directive because the examinations were unproductive. For example, many of the cases
examined under the directive had high “no-change” rates (meaning that there was a high
percentage of examinations that did not result in a change to the amount of tax due).
Results of Review
The IRS Achieved Compliance With the 2020 Treasury Directive for Three Tax
Years Until Compliance Was Terminated
Both the SB/SE and LB&I Divisions were responsible for completing and monitoring audits to
reach the targeted audit rate; however, the SB/SE Division was responsible for preparing the
official audit rate reports for the 2020 Treasury Directive.
11
Due to the statute of limitations
issues previously cited, the IRS started to address the 2020 Treasury Directive audit goal with
TY 2018. However, since the 2020 Treasury Directive requested the IRS to apply the audit rate
goal starting with TY 2016, we included TYs 2016 and 2017 in our review. As such, the IRS
provided TIGTA its monitoring reports including information on the in-process and completed
audits through September 30, 2023, for TYs 2018 through 2021. Figure 1 presents the audit rate
metrics for TYs 2016 through 2021.
12
10
Correspondence, Secretary of the Treasury Janet Yellen to IRS Commissioner Charles Rettig. (Aug. 10, 2022). See
Appendix IV.
11
The SB/SE Division was responsible for preparing the
Audit Rate $10M Monitoring Report
, which monitored the
IRS’s agencywide opened and closed examinations against the total filed returns by tax period for individual taxpayers
with TPI of $10 million or more. The IRS used this report to monitor the 2020 Treasury Directive 8 percent audit rate
goal.
12
The IRS did not provide a breakdown of the audits in process or closed for TYs 2016 and 2017, so this information
was obtained from Table 17 of the IRS Data Book, 2022.
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The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
Figure 1: IRS Audit Rates for Individual Tax Return Examinations
With TPI of $10 Million or More for TYs 2016 Through 2021
13
Source: TIGTA’s analysis of closed and open tax return examinations as of September 30, 2023, per IRS
Monitoring Reports and the IRS Data Book, 2022.
As illustrated in Figure 1, the IRS did not meet the 2020 Treasury Directive goal for TYs 2016 or
2017. As of September 30, 2023, the audit rate for TY 2016 was slightly under 8 percent
(exceeding the then Commissioner’s estimated 6.5 percent audit rate for TY 2016) and
approximately 6 percent for TY 2017. However, the IRS exceeded the 8 percent audit rate goal
(based on the 2020 Treasury Directive) for TYs 2018 through 2020. As of September 30, 2023, it
was still too early to determine the TY 2021 audit rate for the $10 million or more income
earning taxpayers since the tax year is considered open.
In response to the 2020 Treasury Directive, the IRS established additional activity codes used to
track taxpayers earning $10 million or more. In January 2022, the IRS created additional activity
codes to track returns with TPI of $10 million or more. Prior to January 2022, Activity Code 281
was used to track Forms 1040,
U.S. Individual Income Tax Return
, with TPI of $1 million or more.
As part of the activity code revisions, the TPI range covered by Activity Code 281 was split into
three activity codes. One of the three, was Activity Code 284 that was created to track Forms
1040 (individual taxpayers) with TPI of $10 million or more.
As of September 30, 2023, the IRS completed 7,688 examinations of individual returns with TPI
of $10 million or more for TYs 2016 through 2021.
The IRS no longer has a target audit rate in place for examinations of individual returns
with TPI of $10 million or more
In February 2023, IRS executives informed TIGTA that the IRS would continue to audit
high-income individual returns with TPI of $10 million or more but would not aim to achieve
the 8 percent audit rate in the future. IRS executives stated at that time that they considered the
2020 Treasury Directive obsolete. The executives explained that the IRS’s new focus will be on
compliance with the 2022 Treasury Directive to expand examinations of individuals with incomes
of $400,000 or more. In November 2023, the SB/SE Division informed TIGTA that it would no
13
The SB/SE and LB&I Divisions are currently in the process of auditing returns for TYs 2016 through 2021, so values
for these TYs are subject to change. Furthermore, the IRS did not provide a breakdown of the audits in process or
closed for TYs 2016 and 2017 and applied the 2020 Treasury Directive audit rate goal starting with TY 2018.
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The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
longer generate the agencywide
Audit Rate $10M Monitoring Report
and that the last report
prepared was through the end of FY 2023. Therefore, the IRS no longer monitors whether it has
met or needs to put in process additional examinations to meet, the 8 percent audit rate goal
established by the 2020 Treasury Directive for high income individuals with TPI of $10 million or
more.
On April 5, 2023, the IRS issued Publication 3744,
Inflation Reduction Act Strategic Operating
Plan
(hereafter referred to as Strategic Operating Plan) for FYs 2023 to 2031. IRS management
stated that the Strategic Operating Plan was designed to be a framework on how the IRS will
meet the new 2022 Treasury Directive. While the Strategic Operating Plan includes the
expansion of enforcement surrounding high-income high-wealth individuals, the elimination of
its 2020 Treasury Directive audit rate makes it unclear the extent to which the IRS plans to audit
these high-income individual tax returns.
The Strategic Operating Plan includes initiatives to address high-dollar compliance issues, such
as those related to high-income individuals, however, the initiatives do not define high-income
individuals or establish any target audit rates or goals. While the SB/SE Division confirmed that
it would no longer monitor and report the $10 million or more high-income audit rates, it did
communicate that certain case metrics can be evaluated to determine performance of audits,
regardless of whether a target audit rate is provided,
i.e.
, no change rate, dollars recommended
per return/hour, average returns per case, average hours per case, days per return, average case
length, and return pick-up rate. However, goals are not associated with these measures.
IRS management informed TIGTA that their FY 2024 Enterprise-wide Examination Plan outlines
the planned starts for return examinations including those for individuals with TPI of $10 million
or more, which they consider are clear and measurable goals. However, according to the IRS,
the FY 2024 Enterprise-wide Examination Plan has not been finalized and the planned return
examination starts are subject to change. IRS management informed us they are reviewing
FY 2024 first and second quarter examination data to help determine the number of starts they
will need for the rest of the fiscal year.
Achieving a goal of planned new examination “starts” alone, may not allow for the IRS to identify
and work the most egregious highest income returns and could cause Inflation Reduction Act
funds for audits of high-income individual returns to be used inefficiently. For example,
achieving 100 percent of planned examination starts may satisfy the goal; however, if most of
these examinations were closed as no-change, the limited IRS resources would be expended
examining returns of compliant taxpayers who would be unnecessarily burdened.
The Small Business/Self-Employed Division’s Examinations of Individual
Returns of Taxpayers Earning $10 Million or More Have Generally Been More
Productive Than Returns Examined at Lower Income Levels
The SB/SE Division’s management established a Compliance Initiative Project (CIP) to comply
with the 2020 Treasury Directive and at the end of the CIP found that the results justified the
time and resources spent on auditing high-income returns. Furthermore, our analysis of the
SB/SE Division’s closed examinations of individual taxpayers with TPI of $10 million or more, for
TYs 2016 through 2021, as of June 30, 2023, were more productive than TPI ranges of $400,000
to under $10 million. For the six years, the SB/SE Division assessed over $574 million, averaging
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The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
approximately $124,389 per return and approximately $2,220 per hour for individual returns
with TPI of $10 million or more.
14
The Government Accountability Office’s,
Standards for Internal Control in the Federal
Government
,
provides “monitoring” as one of the five components for internal control.
15
Monitoring provides that management should establish and operate monitoring activities to
assess the quality of performance and promptly take corrective actions to achieve objectives.
To monitor and evaluate noncompliance,
the IRS typically uses productivity
measures including, but not limited to,
the average dollars assessed per return
and the average dollars assessed per
hour. The IRS calculates the average
dollars assessed per return by dividing
the sum of the total positive dollars
recommended for each audit by the
number of closed audits. Similarly, the
IRS calculates the average dollars
assessed per hour by dividing the sum of
the total positive dollars recommended
for each audit by the number of hours
spent on these audits. All audits that
result in a refund would be reported as
zero when calculating the total dollars
assessed. We used the IRS’s
methodology in analyzing the data, and
the results of our analysis are presented
in Figures 2 and 3.
Using the Audit Information Management System – Centralized Information System (A-CIS)
closed case data for TYs 2016 through 2021 returns, we calculated and analyzed the average
dollars assessed per return and the average dollars assessed per hour for the SB/SE Division, as
of June 30, 2023.
16
For TY 2016 through 2021, Figure 2 compares the average dollars assessed per return for returns
with TPI of $10 million or more to returns with TPI of $400,000 to under $10 million.
Examinations of returns with TPI of $10 million or more yielded four times more dollars assessed
per return for TYs 2016 through 2021 when compared to the dollars assessed per return for
returns with TPIs of $400,000 to under $10 million.
14
The amount assessed is the sum of the total positive dollars recommended. Therefore, all return examinations that
result in a refund would be reported as zero. The average assessment was calculated using the cumulative total
positive dollars divided by the total returns examined, including returns resulting in a no change or refund.
15
Government Accountability Office, GAO-14-704G,
Standards for Internal Control in the Federal Government
, p.64
(Sept. 2014).
16
SB/SE Division has active exams open/in process for TYs 2016 through 2021, so values for those tax years are
subject to change.
Figure 2: Examinations of Returns with TPI
$10 Million or More Yield 4 Times More Dollars
Assessed per Return.
Source: TIGTA’s analysis of closed tax return
examinations as of June 30, 2023, per A-CIS data
provided by the IRS.
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The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
For TYs 2016 through 2021, Figure 3
compares the average dollars assessed per
hour for examinations of returns with TPI
of $10 million or more to returns with TPI
of $400,000 to under $10 million.
Examinations of returns with TPI of
$10 million or more yielded two times
more dollars assessed per hour for
TYs 2016 through 2021 when compared to
the dollars assessed per hour for returns
with TPIs of $400,000 to under $10 million.
These productivity measures are indicators
that audits of individual returns with TPI of
$10 million or more are more productive
than the TPI ranges shown below
$10 million.
Our analysis of the average dollars
assessed per return and per hour at the
various TPI ranges shows that the SB/SE
Division examinations of returns with TPI of
$10 million or more are more productive than returns with the lower TPI ranges reviewed by
TIGTA. SB/SE management stated that this is because returns with TPI of $10 million or more
tend to have larger issue adjustments and therefore higher recommended tax amounts.
The SB/SE Division’s CIP for the 2020 Treasury Directive was open for approximately three years
and ended in June 2023. The CIP covered selections for TYs 2018 through 2020 and assisted the
SB/SE Division in meeting its share of the 2020 Treasury Directive audit rate requirement, not
covered by examinations selected under other workstreams.
17
On September 26, 2023, the
SB/SE Division issued the CIP Termination Report, detailing the results of the audits of
high-income tax returns. The report stated that there was a total of 1,761 returns examined
under this CIP, of which approximately 25 percent (442 returns) resulted in a no change.
Revenue agents averaged 68 hours to complete each return examination with an average
deficiency of $65,483 and an average of $957 dollars per hour. The IRS has determined that,
based on the results of the CIP, it will continue to address the noncompliance of taxpayers who
filed high-income returns. The IRS believes that the CIP results justified the time and resources
spent on auditing high-income returns. Additionally, the SB/SE Division has partnered with the
Research, Applied Analytics, and Statistics Division to analyze the population of taxpayers who
file these high-income returns to identify areas of noncompliance, so that it can better
determine how to address noncompliance in this population. By selecting returns that are more
productive,
i.e.
, returns resulting in a tax assessment and therefore non-compliant, the SB/SE
Division will also reduce the burden placed on the taxpayers who are more compliant.
In response to an earlier TIGTA audit, the IRS agreed to establish an enterprise examination plan
rather than having the four IRS Operating Divisions establish their own goals, each with their
17
A workstream is a type or category of work, such as the Discriminant Index Function, where returns are selected for
audit based on their computer-scored examination potential.
Figure 3: Examinations of Returns with TPI
$10 Million or More Yield 2 Times More Dollars
Assessed per Hour
Source: TIGTA’s analysis of closed tax return
examinations as of June 30, 2023, per A-CIS data
provided by the IRS.
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The IRS Ceased Compliance With the $10 Million Taxpayer Treasury
Directive in Favor of an Overall Focus on High-Income Taxpayer Noncompliance
own priorities.
18
The IRS is currently in the process of developing a unified examination plan for
the first time. The IRS has also announced a new organizational structure which will further
impact accountability for examination operations.
19
The Strategic Operating Plan does not address the 2020 Treasury Directive required audit rate,
but it does state that the IRS intends to increase enforcement activities to help ensure tax
compliance of high-income high-wealth individuals. However, the Strategic Operating Plan
does not define “high-income” or “high-wealth” individuals. As outlined in Initiative 3.4 of its
Strategic Operating Plan, the IRS intends to use data and analytics to improve their
understanding of tax filings of high-wealth individuals and to pursue noncompliance through a
variety of mechanisms, including audits and non-audit contacts. Success for this initiative
includes an increase in the audit coverage rates and other types of enforcement of high-income
high-wealth taxpayers to improve voluntary compliance. The IRS informed TIGTA that it is in the
process of working on definitions related to Initiative 3.4 of the Strategic Operating Plan. Until
the IRS completes its new process on high-income individual taxpayers at all levels including
taxpayers with TPI of $10 million or more, TIGTA will continue to direct recommendations
pursuant to the existing IRS structure.
Recommendation 1: The Deputy Commissioner, Services and Enforcement, should include a
separate category for taxpayers with TPI of $10 million or more when evaluating the compliance
of high-income individual taxpayers for Initiative 3.4 of the IRS Strategic Operating Plan to
ensure the productivity of examinations on these high-income individual returns is tracked and
analyzed in comparison to examinations of taxpayers at other income levels.
Management’s Response: The IRS partially agreed with this recommendation stating it
has already categorized taxpayers at multiple TPI amounts and monitors productivity
measures related to high-income high-wealth taxpayers, including those with TPI of
$10 million or more, to ensure the most productive returns are selected for examination.
The IRS agrees with TIGTA’s goal of evaluating the compliance of all high-income
high-wealth taxpayers; however, the IRS disagreed that it should compare specific levels
of TPI.
Office of Audit Comment: As part of its commitment to the 2022 Treasury
Directive to not increase audit rates for taxpayers making under $400,000, the IRS
should review and compare the productivity for high-income taxpayers
exceeding this threshold at various ranges. The factors used to identify the most
productive returns at the lower end ($400,000 level) may be quite different than
those related to the highest income taxpayers including those with TPI of
$10 million or more.
18
TIGTA, Report No. 2023-30-008,
Opportunities Exist for the IRS to Develop a More Coordinated Approach to
Examination Workplan Development and Resource Allocation
(Feb. 2023).
19
IR-2023-237,
New Structure Features Single Deputy IRS Commissioner, Four Chief Executive Positions to Cover
Taxpayer Service, Compliance, IT and Operations
(Dec. 13, 2023).
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The Large Business and International Division’s Selection Methods for
Returns Examined as Part of the 2020 Treasury Directive Need Improvement
LB&I case selection methods in place prior to the 2020 Treasury Directive resulted in better
productivity metrics when compared to post-Treasury Directive results. Like the SB/SE Division,
the LB&I Division started to address the 2020 Treasury Directive audit goal with TY 2018. For
TYs 2016 and 2017, an individual return would be opened as part of a related business return
examination, when known adjustments were required to be made at the individual return level.
For the LB&I Division to achieve their designated portion of the 2020 Treasury Directive audit
rate going forward, management needed to use other selection methods.
Prior to the 2020 Treasury Directive, the LB&I Division’s individual returns were generally either:
1) international returns where the taxpayers generally had reported income under $200,000, or
2) returns that were picked up for review based on an associated business return that was
already selected for examination as part of the Global High Wealth (GHW) program.
20
As a
result of the 2020 Treasury Directive, the LB&I Division modified its GHW selection methodology
to identify individual taxpayers with TPI of $10 million or more.
21
The modified GHW model, is
referred to as the High-Income Individual (HII) model and was used by the division for TYs 2018
through 2020.
22
LB&I management explained that in addition to the GHW and HII models, their
division used other selection methods to select individual returns for the 2020 Treasury Directive
audits.
To monitor and evaluate noncompliance, the IRS typically uses productivity measures including
the no change rate, the average dollars assessed per return and the average dollars assessed per
hour. Using the A-CIS closed case data for individual returns as of June 30, 2023, we calculated
and analyzed the three productivity measures for the LB&I Division using the same TPI ranges
applied to the SB/SE Division. We found that there was no TPI range consistently more
productive, including individual returns with TPI of $10 million or more.
As a result of this inconclusive analysis, we further analyzed the LB&I Division’s TY 2016 through
TY 2021 closed case data for individual returns with TPI of $10 million or more, as of
June 30, 2023, by selection method and compared the productivity measures for cases selected
by:
• GHW Model – Returns selected under this model impacted TYs 2016 through 2020
return case selections.
• HII Model – This model was implemented because of the 2020 Treasury Directive and
impacted TYs 2018 through 2020 return case selections.
20
TIGTA, Report No. 2023-30-019,
The IRS Large Business and International Division Should Consider Shifting
Individual Examination Resources to More Productive Examinations
(May 2023). In this report, TIGTA found that most
LB&I individual returns are taxpayers with reported incomes below $200,000. The GHW program takes a holistic view
of an individual income tax return by looking at their entire financial picture and the enterprises they control.
21
In December 2019, the LB&I Division used the GHW model to select individual TY 2018 returns for examination.
However, in response to the 2020 Treasury Directive, the LB&I Division reselected its TY 2018 individual returns in
March 2020 using the modified GHW model.
22
For TY 2021, the LB&I Division moved to a selection method called the Artificial Intelligence Risk model to identify
individual taxpayer returns with TPI of $10 million or more. However, as of our analysis on June 30, 2023, there were
no closed returns from this selection method.
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• Other – All other selection methods were combined under this category.
23
As of June 30, 2023, for TYs 2016 through 2021, the LB&I Division assessed over $715 million,
averaging approximately $329,257 per return and approximately $2,157 per hour.
24
Figure 4
shows the percentage of closed examinations in the LB&I Division, for individual taxpayers with
TPI of $10 million or more selected by the HII model, the GHW model and all other methods for
TYs 2016 through 2021, as of June 30, 2023.
Figure 4: LB&I Division Closed Examinations of Individual Tax Returns with TPI of $10 Million or
More by Selection Method for TYs 2016 Through 2021
25
Source: TIGTA’s analysis of closed tax return examinations as of June 30, 2023, per A-CIS Data provided
by the IRS.
As previously stated, the IRS began addressing the 2020 Treasury Directive starting with the
TY 2018 audit rate goal, primarily due to statute of limitation issues. Therefore, we consider
examinations of individual tax returns with TPI of $10 million or more for TYs 2016 and 2017 as
pre-Treasury Directive. As shown in Figure 4, prior to the 2020 Treasury Directive,
i.e.
, TYs 2016
and 2017, LB&I Division’s selection of individual tax returns with TPI of $10 million or more for
examination primarily came from selection methods outside of the GHW program. A definite
shift in LB&I’s selection of these high-income returns is apparent beginning with TY 2018 (the
first tax year impacted by the 2020 Treasury Directive) where the HII model was responsible for
most of the returns selected.
Across these selection methods, we found that LB&I examination results were better in TYs 2016
and 2017, before modifications were made to the selection methodology based on the issuance
23
For TYs 2016 through 2021, the “other” category includes selection methods for various work streams such as Joint
Committee, captive insurance, and S Corporation distribution.
24
The amount assessed is the sum of the total positive dollars recommended. Therefore, all audits that result in a
refund would be reported as zero.
25
LB&I is currently in the process of auditing returns for TYs 2019 through 2021, so values for these TYs are subject to
change.
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of the 2020 Treasury Directive, than in
subsequent tax years.
26
Figure 5 compares
the no change rate by case selection
method for individual returns with TPI of
$10 million or more for TYs 2016 and 2017
(pre-directive) to TYs 2018 through 2020
(post-directive).
27
The no change rate for the GHW selection
model and the HII selection model (used in
TYs 2018 through 2020) has increased since
TY 2016. The no change rate for audits
selected through “other” methods has
decreased. It is possible that the no change
rate for TYs 2019 through 2020 may decrease,
as audits are still in process for these tax years.
IRS management stated that no change
examinations typically take less time to
complete than examinations requiring
adjustments. As the examination cycle
progresses for a particular tax year, the no
change rate will typically decrease as audits
requiring adjustments are completed.
26
As of June 30, 2023, the LB&I Division had closed only four examinations of individual taxpayers with TPI of
$10 million or more for TY 2021, therefore, due to limited data, we excluded this tax year from our analysis as shown
in Figures 5 through 7.
27
After June 30, 2023, the LB&I Division continues to audit returns for TYs 2019 through 2020, therefore the values
for those tax years, as shown in Figures 5 through 7, are subject to change.
Source: TIGTA’s analysis of closed tax return
examinations as of June 30, 2023, per A-CIS data
provided by the IRS.
Figure 5: Examinations of Returns with TPI $10
Million or More Were Less Productive After
Selection Method Modifications Were Made in
Response to the 2020 Treasury Directive
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Figure 6 compares the average dollars assessed per return by case selection method for
individual returns with TPI of $10 million or more for TYs 2016 and 2017 (pre-directive) to
TYs 2018 to 2020
(post-directive).
As Figure 6 shows, the average dollars
assessed per return with TPI of $10 million
or more was nearly six times more
productive prior to the 2020 Treasury
Directive.
Figure 7 compares the average dollars
assessed per hour by case selection
method for individual returns with TPI of
$10 million or more for TYs 2016 and 2017
(pre-directive) to TYs 2018 to 2020
(post-directive) in the LB&I Division.
As shown in Figure 7, the average dollars
assessed per hour on returns with TPI of
$10 million or more were nearly 14 times
more productive prior to the 2020 Treasury
Directive. Overall, we found that the no
change rate was lower and average dollars
assessed per return and the average dollars
assessed per hour were higher in TYs 2016 and
2017 prior to the 2020 Treasury Directive.
LB&I Division management stated that factors
such as attrition and workforce played a role in
the no change rate, citing significant attrition
of 5 to 10 percent per year with less agents
available to open new cases to meet goals.
Management added that cases changed hands
many times as agents left, adding to high cycle times and a higher likelihood of cases closing
due to statute of limitation issues. The Division’s FY 2022 and third quarter FY 2023 Key Stat
reports noted that the number of staff years applied to all LB&I returns went from approximately
1,616 staff years in FY 2018 to approximately 937 as of June 2023, suggesting that their
workforce has decreased during that time. Additionally, according to a TIGTA report released in
August 2023, at the end of FY 2019 there were 3,040 revenue agents in LB&I and as of
Figure 6: The Average Dollars Assessed per
Return with TPI of $10 million or more were
Nearly 6 Times More Productive Prior to the
2020 Treasury Directive
Source: TIGTA’s analysis of closed tax return
examinations as of June 30, 2023, per A-CIS data
provided by the IRS.
Source: TIGTA’s analysis of closed tax
return examinations as of June 30, 2023,
per A-CIS data provided by the IRS.
Figure 7: The Average Dollars Assessed
per Hour with TPI of $10 million or more
were Nearly 14 Times More Productive
Prior to the 2020 Treasury Directive
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March 31, 2023, there were 2,908 in LB&I, which is a 4.3 percent decrease.
28
Management also
shared that the new Bipartisan Budget Act of 2015 centralized partnership audit regime
procedures were not always clear and resulted in premature closures for a variety of issues
thereby contributing to the increased no change rate.
29
The IRS’s primary objective in selecting returns for examination is to promote the highest degree
of voluntary compliance on the part of taxpayers. This requires the exercise of professional
judgement in selecting sufficient returns of all classes to assure taxpayers receive equitable
consideration by using available experience and statistics indicating the probability of
substantial error, and in making the most efficient use of examination staffing and other
resources.
30
As detailed above, there are multiple factors influencing the LB&I Division’s increasing no
change rates and lower productivity measures.
31
Ultimately, all factors should be considered in
reviewing the methods used by the LB&I Division to select returns for examination to promote
the highest degree of voluntary compliance and efficient use of limited resources. Also, if the
IRS continues to select returns of taxpayers who are compliant, this imposes an unfair burden on
those taxpayers.
Recommendation 2: The Commissioner, Large Business and International Division, should
identify the potential causes for the low productivity examination results and monitor the
productivity measures related to the highest income individual taxpayers including those with
TPI of $10 million or more, ensuring the most productive returns are selected for examination.
Management’s Response: The IRS partially agreed with this recommendation with
respect to the need to identify potential causes for the low productivity examination
results and stated that it had already taken steps to identify the causes. The IRS plans to
use enhanced data and analytics to select cases based on the highest risk of
noncompliance.
Office of Audit Comment: Although the IRS partially agreed with this
recommendation, it did agree to monitor productivity measures related to
high-income high-wealth taxpayers, including those with TPI of $10 million or
more, to ensure the most productive returns are selected for examination. In
combination with the IRS’s response to Recommendation 1 and this
recommendation that includes identifying the potential causes for the low
productivity examination results, the collective actions taken should fully address
this recommendation.
28
TIGTA, Report No. 2023-30-054,
The IRS Needs to Leverage the Most Effective Training for Revenue Agents
Examining High-Income Taxpayers
p. 10 (Aug. 2023).
29
Pub. L. No. 114-74, § 1101, 129 Stat. 625.
30
Internal Revenue Manual 1.2.1.5.10(2) (June 1, 1974).
31
LB&I management stated that other factors including workload may also impact the increasing no change rates
and lower productivity measures. We did not review workload levels in this audit.
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The IRS Overstated the Opportunity Costs Associated With the 2020 Treasury
Directive
On March 13, 2020, the then IRS Commissioner responded to the then Secretary of the Treasury
citing the resource needs of at least 400 full-time revenue agents, with the majority being at
General Schedule Grade 13 level. The then Commissioner also cited the following opportunity
costs associated with complying with the 2020 Treasury Directive:
• Approximately 900 fewer audits of large and mid-size business returns.
• 600 fewer audits of small corporate returns.
• 850 fewer audits of individual returns with TPI under $10 million.
The then Commissioner was stating that a total of 1,500 business returns and 850 individual
returns could not be worked if the 2020 Treasury Directive were undertaken, since resources
would need to be reallocated to work the additional returns required to meet the Directive. Our
review identified that these stated opportunity costs were based on the additional examinations
(not including in process or planned examinations) required to collectively meet the 2020
Treasury Directive for TYs 2017 and 2018.
We reviewed the IRS’s calculations to determine the opportunity costs for working on individual
returns with TPI of $10 million or more. At the time of the IRS’s response, the IRS had already
started or planned to start about 45 percent of the audits it would need to complete to reach
the 8 percent audit rate for TYs 2017 and 2018 combined.
The IRS provided us with the methodology used by the SB/SE Division to determine how it
identified approximately 600 fewer small corporate returns and about 850 fewer audits of
individual returns with TPI under $10 million would be conducted in TYs 2017 and 2018, for the
IRS to complete the additional audits necessary to reach the 8 percent audit rate goal of audits
over $10 million TPI. However, the IRS did not provide us with the methodology used by the
LB&I Division to determine how it identified that about 900 fewer large and mid-size business
audits would be conducted. The IRS stated that it did not have the exact computations that led
to the figure. As a result, for our assessment, we used information from the FY 2019 LB&I Key
Stats report to calculate how many large and mid-size business audits the IRS would need to
forego to complete the additional audits necessary to achieve the 8 percent audit rate for
TYs 2017 and 2018. We determined that the IRS would work approximately 710 fewer
combined large and mid-size business audits, which is 190 less audits than the 900 audits
documented in the then Commissioner’s March response. Therefore, the opportunity costs
appear to be overstated.
When we asked what the retention policy is for the calculations used in the Commissioner’s
memorandum, we were provided with the IRS General Records Schedule, which states that
common office records or administrative records maintained by any agency office can be
destroyed once there ceases to be a business use. However, according to Federal Records
Management, records that are evidence of an agency’s decisions must be managed properly for
the agency to function effectively and to comply with Federal laws and regulations and as such,
“the head of each Federal agency shall make and preserve records containing adequate and
proper documentation of the organization, functions, policies, decisions, procedures, and
essential transactions of the agency and designed to furnish the information necessary to
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protect the legal and financial rights of the Government and of persons directly affected by the
agency’s activities.”
32
If the support for information reported in the Commissioner’s
memorandum is not maintained, then there is no way to determine if the data in the
memorandum is accurate because there is no way to verify the accuracy of the calculations used
to determine these figures.
32
Records Management by Federal Agencies, Pub. L. 90–620, 82 Stat. 1297 (codified as amended in 44 United States
Code Section 3101).
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Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to determine whether the IRS was meeting the
Department of the Treasury’s established goal of auditing a minimum of 8 percent of all
high-income individual returns filed each year.
1
To accomplish our objective, we:
• Assessed the IRS’s processes and procedures for selecting high-income returns for audit,
including reviewing the Internal Revenue Manual, programming guides, and interviewing
IRS Management to determine how the IRS selected high-income tax returns for audit,
along with understanding any differences between the SB/SE and LB&I Divisions’
processes.
• Determined if any changes were made to the process once the Treasury Directive was
issued in February of 2020.
• Reviewed the IRS’s calculations of audit rates for high-income tax returns for TYs 2016
through 2021.
• Reviewed the results of the audits performed to determine the productivity and manner
of disposition for each audit. We also compared the productivity of high-income audits
to audits of returns with TPI less than $10 million for both the SB/SE and the LB&I
Divisions. Additionally, we compared the productivity measures of high-income audits
conducted by the LB&I Division based on selection methods.
• Reviewed the IRS Strategic Operation Plan and interviewed management on their plans
to monitor and evaluate examination results of the highest income individual taxpayers,
including those with TPI of $10 million or more.
• Validated available IRS information supporting the then Commissioner’s March 2020
response to the Secretary of the Treasury reflecting the opportunity costs of shifting
resources to meet the 2020 Treasury Directive.
Performance of This Review
This review was performed with information obtained from the Headquarters offices of the
SB/SE Division located in Lanham, Maryland and the LB&I Division located in Washington, D.C.,
during the period February 2023 through March 2024. We conducted this performance audit in
accordance with generally accepted government auditing standards. Those standards require
that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit objective. We believe that
the evidence obtained provides a reasonable basis for our findings and conclusions based on
our audit objective.
Major contributors to the report were Phyllis Heald London, Acting Assistant Inspector General
for Audit (Compliance and Enforcement Operations); Michele Jahn, Director; Javier Fernandez,
1
Our audit focused on IRS examinations of individual returns with total positive income of $10 million or more, which
the IRS used to comply with the minimum 8 percent audit rate goal.
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Audit Manager; Aranxa Delgado, Lead Auditor; Stephanie Finlay, Lead Auditor; Yancy Tam,
Auditor; and Laura Christoffersen, Information Technology Specialist.
Data Validation Methodology
We performed tests to assess the reliability of data from the A-CIS. We evaluated the data by
(1) performing electronic testing of required data elements, (2) reviewing existing information
about the data and the system that produced them, (3) interviewing agency officials
knowledgeable about the data, (4) reconciling selected data to the Integrated Data Retrieval
System. We determined that the data were sufficiently reliable for purposes of this report.
Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the
following internal controls were relevant to our audit objective: the IRS’s policies, procedures
and practices related to the selection of individual returns for examination by the SB/SE and
LB&I Divisions. We evaluated these controls by interviewing management, reviewing reports,
and analyzing closed examination data.
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Appendix VI
Glossary of Terms
Term Definition
Activity Code A code that identifies the type and condition of returns selected for audit.
Audit Information
Management System –
Centralized Information
System
A database that provides monthly Audit Information Management System
data on both open and closed cases.
Discriminant Index
Function
A mathematical technique used to computer-score income tax returns as to
examination potential. Examination potential is indicated by a numeric
score that is assigned to each return by examination class; the greater the
score, the greater the examination potential within each examination class.
Fiscal Year
Any yearly accounting period, regardless of its relationship to a calendar
year. The Federal Government’s fiscal year begins on October 1 and ends
on September 30.
General Schedule
The classification and pay system established under 5 United States Code
Chapter 51 and Subchapter III of Chapter 53. It is a rate of basic pay for
professional, technical, administrative, and clerical professionals working for
the Federal Government.
Revenue Agent
Employees in the Examination function who conduct face-to-face
examinations of more complex tax returns, such as businesses,
partnerships, corporations, and specialty taxes.
Tax Year
A 12-month accounting period for keeping records on income and
expenses used as the basis for calculating the annual taxes due. For most
individual taxpayers, the tax year is synonymous with the calendar year.
Total Positive Income
The sum of all positive amounts shown for the various sources of income
reported on the individual tax return and, therefore, excludes losses.
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Appendix VII
Abbreviations
A-CIS Audit Information Management System – Centralized Information System
CIP Compliance Initiative Project
FY Fiscal Year
GHW Global High Wealth
HII High-Income Individual
IRS Internal Revenue Service
LB&I Large Business and International
SB/SE Small Business/Self-Employed
TIGTA Treasury Inspector General for Tax Administration
TPI Total Positive Income
TY Tax Year
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contact our hotline on the web at www.tigta.gov
or via e-mail at
oi.govreports@tigta.treas.gov.
To make suggestions to improve IRS policies, processes, or systems
affecting taxpayers, contact us at www.tigta.gov/form/suggestions
.
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